S&P penalty may reach $5 billion from U.S. suit over ratings

McGraw-Hill fell 7.6% at 2:19 p.m. in New York. It tumbled the most in 25 years yesterday when the company said it expected the lawsuit.

The Justice Department probe, code-named “Alchemy,” began in November, 2009. The suit marked the culmination of a “massive, multiyear investigation” by a team of almost two dozen lawyers, Stuart Delery, principal deputy assistant attorney general said.

Over the course of the investigation, the company turned over more than 20 million pages of documents, which included e- mail between the firm’s employees, said a person familiar with the probe, who asked for anonymity to discuss details. Those e-mails, along with questions about the models used by the company to rate bonds, have become the basis for the department’s lawsuit.

‘Tricky Time’

“It’s going to be a tricky time for rating agencies,” Fred Ponzo, a capital markets analyst at Greyspark Partners in London, said in a telephone interview. “S&P is probably just the first to face the music.”

Fitch Ratings has “no reason to believe” it faces a similar lawsuit, said Dan Noonan, a spokesman in New York for the third-largest credit-rating firm in an e-mailed statement.

S&P stripped the U.S. of its AAA credit rating on Aug. 5, 2011, and said the world’s biggest economy was no longer the safest of borrowers. The downgrade failed to dissuade investors as dollar-denominated assets have appreciated.

Holder said the downgrade of U.S. debt had “no connection” to the decision to bring the suit against the company. He didn’t rule out a settlement between the government and the company, though he said the case wouldn’t have been brought if he weren’t sure the government would win.